The bankruptcy of Texas Competitive Electric Holdings, owner of retail electricity provider TXU Energy and power generator Luminant, is imminent, Moody’s analysts projected in a report this week.
The power company could run out of money before the year’s end, soon followed by the bankruptcy of its parent, Energy Future Holdings, said Moody’s analyst Jim Hempstead.
The staggering debt is a legacy of a massive $45 billion leveraged buyout in 2007 — one of the largest in history — by Kohlberg Kravis Roberts & Co., TPG Capital and Goldman Sachs Capital Partners.
Energy Future Holdings and its subsidiaries currently have more than $40 billion in debt. Of that, subsidiary company Texas Competitive Electric Holdings owes $30 billion and has a value of about $15 billion.
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The bankruptcy should not create any generation issues or power disruption for the grid, Hempstead said.
“Our expectation is that there should be no material impact on the grid,” he said. “We have never seen a bankruptcy that has turned the lights off. All of the Luminant assets are going to get scrutinized as to what is economical and what is not — there may be a plant or two that is shut down or mothballed or otherwise taken out of the stack.”
However, the bankruptcy may cause customers to leave TXU, especially if the bankruptcy proceedings are seen as contentious, Hempstead said.
“We think the other reps would move swiftly to pick off the best customers,” Hempstead said. “That is a risk to the valuation of the business.”
Energy Future Holdings’ transmission company, Oncor, is owned by a separate subsidiary, and is not expected to file for bankruptcy.
If the bankruptcy occurs, it will be one of the largest corporate bankruptcies outside of the financial industry in terms of total debt outstanding.
Telecommunications company WorldCom Inc. had $33.1 billion in debt at the time of its bankruptcy in 2002, while Enron had $10.5 billion in debt when it shuttered its doors in 2001.
The leverage buyout was negotiated on the belief that natural gas prices would stay high – a forecast that has since proven false.
“The ability to service that debt included an assumption that gas prices would go no lower than $6 per million cubic feet,” Hempstead said. “The other assumption was that if natural gas prices did fall, they were volatile and would not stay low for a long period of time.”
Instead, both natural gas prices and power prices have stabilized at lower prices, making sufficient cash flow a growing problem for Energy Future Holdings.
“This is a story about too much debt,” Hempstead said. “It was an aggressive use of leverage, and it didn’t work.”
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